Question 1

Which of the following best describes the principle of optimization in economics?

Accepted Answer

Economic agents choose the best feasible alternative that provides the highest net-benefit, where net-benefit is calculated as $$	ext{Net-Benefit} = 	ext{Benefits} - 	ext{Costs}.$$

Question 2

In a perfectly competitive market, which of the following statements is TRUE?

Accepted Answer

All buyers and sellers are price takers, and no individual can influence the market price.

Question 3

Suppose a consumer has an income of $$\24$, the price of milk is $$\$$4$$ per unit, and the price of cookies is $$\2$ per unit. According to the buyer's problem, what is the condition for the optimal consumption bundle?

Accepted Answer

$$\frac{MB_{milk}}{p_{milk}} = \frac{MB_{cookies}}{p_{cookies}}$$ and the budget is exhausted.

Question 4

If the marginal cost (MC) of producing an additional unit is less than the average total cost (ATC), what happens to ATC as output increases?

Accepted Answer

ATC decreases.

Question 5

A firm in the short run will continue to produce as long as:

Accepted Answer

$$P \u003e AVC$$

Question 6

Which of the following best describes consumer surplus?

Accepted Answer

The difference between a buyer's willingness to pay (marginal benefit) and the price of the good.

Question 7

Suppose the price of a good increases from $$\10$ to $$\$$12$$, and the quantity demanded decreases from $$100 to$$ $$80. $$Using the arc elasticity formula, what is the price elasticity of demand?

Accepted Answer

$$\epsilon = \frac{(80-100)/((80+100)/2)}{(12-10)/((12+10)/2)} = \frac{-20/90}{2/11} \approx -1.22$$

Question 8

A negative externality exists in a market when:

Accepted Answer

The social cost of a transaction exceeds the private cost.

Question 9

Which of the following is a government solution to a negative externality?

Accepted Answer

Pigouvian tax equal to the marginal external cost.

Question 10

In the long run, in a perfectly competitive market with identical cost structures, what is the expected economic profit for firms?

Accepted Answer

Zero, because entry and exit drive profits to zero.

Question 11

Suppose a market for gasoline generates pollution, a negative externality. If the marginal private cost (MPC) is $$\2$ per gallon and the marginal external cost (MEC) is $$\$$1$$ per gallon, what is the marginal social cost (MSC)?

Accepted Answer

$$MSC = MPC + MEC = \3$

Question 12

Which of the following is TRUE about a monopoly compared to perfect competition?

Accepted Answer

A monopoly sets price above marginal cost and restricts output below the competitive level.

Question 13

If a firm’s average variable cost (AVC) is $$\5$ and its average total cost (ATC) is $$\$$8 at a $$certain output, what is the average fixed cost (AFC) at that output?

Accepted Answer

$$AFC = ATC - AVC = \3$

Question 14

Which of the following best describes the labor-leisure trade-off in the context of factor markets?

Accepted Answer

Workers choose between working more hours and earning more income versus enjoying more leisure time.

Question 15

In the context of trade, for two countries to benefit from specialization and exchange, the terms of trade must:

Accepted Answer

Lie between the opportunity costs of both countries.

Question 16

Which of the following is a characteristic of monopolistic competition in the long run?

Accepted Answer

Firms earn zero economic profit due to free entry and exit.

Question 17

If the price elasticity of supply is $$\epsilon = 0$$, what does this imply about the supply curve?

Accepted Answer

The supply curve is perfectly inelastic.

Question 18

A positive externality in the market for flu vaccinations will result in:

Accepted Answer

The market producing less than the socially optimal quantity.

Question 19

Which of the following is NOT a source of wage differences in labor markets?

Accepted Answer

Perfect competition among workers.

ECON 2001 Microeconomics Review: Principles, Consumer and Producer Behavior, Market Structures, and Externalities

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